Part 4 – Cash is king
Accrual accounting is important to understand what entities own and owe, and what revenue and expenses accrued during a period. It is equally important to understand cash inflows and cash outflows, how these inflows were generated, and how cash was spent. The cash flow statement is an integral part of the financial statements, but it is not always treated this way by preparers.
Preparers often prepare the cash flow statement by using the movement in the opening and closing balances of items in the statement of financial position to present line items. As a result, there are many non-cash items that are not adjusted for in the cash flow statement. The most common items include:
- Interest/dividends received or paid – accrued amounts are not adjusted.
- Proceeds received on the disposal of assets – omitted.
- Investments in assets – accrued amounts (i.e. amounts not yet paid) are not adjusted.
- Depreciation and impairment losses not adjusted in reconciliation.
Preparing the cash flow statement requires detailed knowledge of the underlying transactions and events to know what non-cash items exist and what should be adjusted. It is critical that management implement appropriate systems and processes to keep record of the non–cash or other adjusting items during the year.
We have observed that entities apply one materiality threshold for the preparation of the financial statements – this threshold is applied across the financial statements and notes. It is important to note that different materiality thresholds and qualitative criteria could apply to the components of the financial statements and specific line items. Preparers should consider whether certain items in the cash flow statement require specific materiality considerations.
The ASB recently completed a review on compliance with GRAP 2 on Cash Flow Statements and will issue a Research Paper outlining its findings in June 2021.
Useful links:
GRAP 2 on Cash Flow Statements: access.
Disclaimer
This content has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved or otherwise acted on by the Board.